Resources to Learn About the Debt Market/Brokerage?

Hey guys,

I'm currently an IS broker looking to learn more about the debt market. I want to be more well-rounded in general and have a baseline understanding so I know what I'm talking about if it comes up.

I've worked on one debt deal and have exposure to terms like Libor plus x% for rate, understand what basics things like amortization might do to the overall loan, but want to know if there are resources where I can learn like someone at a top shop like HFF (now JLL) might/prepare for an entry level role.

My boss would be a resource, but he's hands off and didn't explain much on the deal. Other's in my office are focused on what they're doing so I'd rather try to learn this on my own.

I have Peter Lineman's textbook and am going through it so I have finance concepts down.

What I'm looking for is resources to learn about the basics and if there are certain publications/websites those that focus on it use day to day. For example, I see loans getting refinanced on Pincus weekly, but don't know where to start to really get into it/the proper way.

Any help would be appreciated.

 

See if you can get access to commercial mortgage alert. Great publication. Also Real Estate Alert. Otherwise, it's kind of just learning by listening and doing. Eventually things start to click - don't worry - there are plenty of concepts on construction loan pricing and the like my old firm used to use that no one could even explain. Everyone is faking it until they make it. 

What other basics are you trying to learn? It really seems like you have it down - base rate plus spread, you understand amortization, etc. If you tell me more about what you want to learn, I may be able to add more information. 

 

I guess really about the overall market. How someone is pricing the debt they're willing to give? How do they come back to you with what terms they're willing to give you and how much money to lend to you? Also what LIBOR rate do they use? I'm seeing 3, 6, and 12 month rates + side note isn't LIBOR going away?

Are all of these things something the broker should know as well, I feel like it is or at least have a ballpark idea. I want to get a better overall picture because usually when I see the mortgage (on CoStar/Reonomy) my eyes glaze over and I move on.

 
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That was actually one of the hardest things for me to understand and it comes with time. It took me about 18 months to quickly look at a deal that came in and say, I know this will price at L+150. Keep in mind, pricing is not only dependent on risk, but where in the market you work. The institutional $50MM plus market prices different than the $10MM market for a similar type value add deal. 

Regarding different types of Libor, that just depends on the lender. Most will quote over 1 Month Libor, but others over different term (3 month, 6 month, etc.). I’m sure there is a reason they do this, but I can’t tell you why. What you really need to be able to do is level set rates - for instance, if you are compared a fixed rate loan against a floating rate loan which will be swapped, you need to be able to understand how to get the full rate (including the swap cost) so you can look at the loans apples to apples. You can also calculate the total rate by saying, okay, we have two loans, both over 1 Month Libor, the entry fees are 1% and .05%, and the spreads are 100 bps and 200 bps. Well, which is cheaper. That’s the value add, setting up your rate matrix and being able to level set each quote and compare structure on the deal too. 

In terms of pricing and terms they will give. People are willing to give “market.” You’ll learn this over time as you do more deals. Generally you’ll see some lenders not willing to give on certain terms while others don’t care. Every firm has different things they are care or are willing to give on. So it’s firm dependent and the market also determines. For instance, when COVID started lenders wanted 12 months of cash reserves in the bank on some deals - that’s something that’s a ‘market’ ask. Some firms may have said I don’t need that. That’s called trying to win a deal and be competitive. In terms of size of the loan, that comes down to sizing. Pricing is determined by risk of the deal, credit, LTV/LTC, and again, the market. This is one of the hardest things to ‘get’ because it just comes with feel. Give it time and it’ll start to make sense. 

Libor is going away. But you can still quote over it. You’ll see in the term sheet or loan docs there is ‘Libor replacement language.’ This language has been heavily negotiated over the last few years as Libor gets phased out, people want clear answers on how their debt will be priced when that occurs. 

 

Great response, thank you. This is a shift from the original thread, but I'm also curious how the overall economy affects the real estate market. If you're in NYC, I understand local and state politics play a big role in laws that get passed that can greatly affect the industry. In terms of the economy/monetary policy, is it just understanding that if 10 year treasury rates rise that has an overall affect on cap rates long term and where the S&P 500 is/returns you can get there will translate to real estate and if the real estate market is getting lower returns people will move to the stock market where they may get higher returns on growth+dividends?

I don't have a 100% certain grasp on this, but could you explain the relationship between the two in say NYC real estate? Also, I feel like I should pick up a economics textbook or something to get a baseline understanding because it seems easy to grasp and I try to learn by reading, but not 100% there yet.

 

It’s not really a simple answer. Theoretically, sure, if T bonds have higher yield, people will cycle out of real estate. However, treasuries can increase, lending spreads can decrease, therefore the cost of debt stays the same. Therefore cap rates may not move. I’m definitely not an economist, but in a nutshell, it’s not a simple answer and there really isn’t an answer. That’s why valuation is an art and not a science. It’s also why people place cap rate expansion into their valuation to allow some fluff. 

As an alternative thought; if you believe real estate investment and flows are driven by the institutional investors. Many of them look to Corporate bond spreads to determine relative value of real estate investing. So if corporate bond spreads decrease, one may allocate to real estate more. 

Once again, just trying to show its not a simple answer and I can’t really answer your question. But maybe an economist on the forum, if someone here is an MS or PHD in Econ, can answer? 

 

Read the 666 5th Avenue restructuring case study published in PDF format via Columbia University. Google for it it’s floating around.

If you can read that cover to cover without having any issue comprehending it you’re in pretty good shape.

I would then backfill all of your knowledge gaps with other follow on research and Google searches for white papers and professional literature on the various subject matters that you don’t have a grasp on.

I had a flair for languages. But I soon discovered that what talks best is dollars, dinars, drachmas, rubles, rupees and pounds fucking sterling.
 

This correct?

https://www.arch.columbia.edu/student-work/9034-666-fifth-avenue

https://www.filepicker.io/api/file/xAWQ5TW1Q9eJC7NZc8Hx

Edit: Looking through this is it just me or are there tons of errors? First page typos, million instead of billion, I think even getting the prompt wrong and saying they're looking for x money for 10% of the deal then later down the line it's flipped.

I read through it and understand it, but if this is the final product of a MSRED program it's showing me what a waste of money it is.

Then Columbia posts it on their website without even proofreading it it seems.

Seems they don't even have the basic concepts on GP/LP down and general RE knowledge which you'd expect them to learn.

 

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